To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen.

This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regressions you can skip ahead a few paragraphs.

Regression analysis (or “running regressions”) is a fairly straightforward and simple technique that is used on a daily basis by economists who work with data, not to mention people in many other professions from financiers to biologists. Because it is so simple and straightforward, a popular form of regression analysis (“ordinary least squares” or “OLS”) regression is even built into popular spreadsheets like Excel. I think the easiest way to explain OLS is with an example. Say that I have yearly data going back to 1952 for a very small town in Nebraska. That data includes number of votes received by each candidate in elections for the city council, number of people with jobs, and number of city employees convicted of graft. If I believed that the votes incumbents received rose with the number of people jobs and fell with political scandals, I could have OLS return an equation that looks like:

B0, B1, and B2 are numbers, and OLS selects them in such a way as to minimize the sum of squared errors you get when you plug the data you have into the equation. Think of it this way – say the equation returned was this:

Number of incumbent votes in any given year

= 28 + 0.7*employed people – 20*employees convicted of graft

That equation tells us that the number of incumbent votes was equal to 28, regardless of how many people were employed or convicted of graft. (Bear in mind – that first term, the constant term as it is called, sometimes gives nonsensical results by itself and really is best thought of as “making the equation add up.”) The second term (0.7*employed people) tells us that every additional employed person generally adds 0.7 votes. The more people with jobs, the happier voters are, and thus the more likely to vote for the incumbent. Of course, not everyone with a job will be pleased enough to vote for the incumbent. Finally, the last term (- 20*employees convicted of graft) indicates that every time someone in the city government is convicted of graft, incumbents lose 20 votes in upcoming elections due to an increased perception that the city government is lawless.

Now, these numbers: 28, 0.7, and -20 are made up in this example, but they wouldn’t have been arrived at randomly. Instead, remember that together they form an equation. The equation has a very special characteristic, but before I describe that characteristic, remember – this is statistics, and statistics is an attempt to find relationships based on data available. The data available for number of people employed and number convicted of graft – say for the year 1974 – can be plugged into the equation to produce an estimate of the number of votes. That estimate can then be compared to the actual number of votes, and the difference between the two is the model’s error. In fact, there’s an error associated with every single observation (in our example, there’s one observation per year) used to estimate the model. Errors can be positive or negative (the estimate can be higher than the actual or lower), or even zero in some cases.

OLS regression picks values (the 28, 0.7, and -20 in our example) that minimize the sum of all the squared errors. That is, take the error produced each year, square it, and add it to the squared errors for all the other years. The errors are squared so that positive errors and negative errors don’t simply cancel each other out. (Remember, the LS in OLS are for “least squares” – the least squared errors.) You can think of OLS as adjusting each value up or down until it spots the combination that produces the lowest total sum of squared errors. That adjustment up and down is not what is happening, but it is a convenient intuition to have unless and until you are someone who works with statistical tools on a daily basis.

Note that there are forms of regression that are different from OLS, but for the most part, they tend to produce very similar results. Additionally, there are all sorts of other statistical tools, and for the most part, for the sort of problem I described above, they also tend to produce similar outcomes.

I gotta say, after I wrote the paragraphs above, I went looking for a nice, easy representation of the above. The best one I found is this this download of a power point presentation from a textbook by Studenmund. It’s a bit technical for someone whose only exposure to regressions is this post, but slides eight and thirteen might help clarify some of what I wrote above if it isn’t clear. (And having taught statistics for a few years, I can safely say if you’ve never seen this before, it isn’t clear.)

OK. That was a lot of introduction, and I hope some of you are still with me, because now it is going to get really, really cool, plus it is guaranteed to piss off a lot of people. I’m going to use a regression to explain the growth in real GDP from one year to the next using the top marginal tax rate and the top marginal squared. (In other words, explaining the growth in real GDP from 1994 to 1995 using the top marginal rate in 1994 and the top marginal rate in 1994 squared, explaining the growth in real GDP from 1995 to 1996 using the marginal rate in 1995 and the top marginal rate in 1995 squared, etc.) If you aren’t all that familiar with regressions, you might be asking yourself: what’s with the “top marginal rate squared” term? The squared term allows us to capture acceleration or deceleration in the effect that marginal rates have on growth as marginal rates change. Without it, we are implicitly forcing an assumption that the effect of marginal rates on growth are constant, whether marginal rates are five percent or ninety-five percent, and nobody believes that.

Using notation that is just a wee bit different than economists generally use but which guarantees no ambiguity and is easy to put up on a blog, we can write that as:

From an intuition point of view, the model tells us that at low tax rates, economic growth increases as tax rates increase. Presumably, in part because taxes allow the government to pay for services that enhance economic growth, and in part because raising tax rates, at least at some levels, actually generates more effort from the private sector. However, the benefits of increasing tax rates slow as tax rates rise, and eventually peak and decrease; tax rates that are too high might be accompanies by government waste and decreased private sector incentives.

The green highlights tell us that each of the pieces of the equation are significant. That is to say, the probability that any of these variables does not have the stated effect on the growth in real GDP is very (very, very) close to zero.

And to the inevitable comment that marginal tax rates aren’t the only thing affecting growth: that is correct. The adjusted R Square, highlighted in orange, provides us with an estimate of the amount of variation in the dependent variable (i.e., the growth rate in Real GDP) that can be explained by the model, here 17.6%. That is – the tax rate and tax rate squared, together (and leaving out everything else) explain about 17.6% of growth. Additional variables can explain a lot more, but we’ll discuss that later.

Meanwhile, if we graph the relationship OLS gives us, it looks like this:

Figure 2

So… what this, er, (if I may be so immodest) “Kimel curve” shows is a peak – a point an optimal tax rate at which economic growth is maximized. And that optimal tax rate is about 67%.

Does it pass the smell test? Well, clearly not if you watch Fox News, read the National Review, or otherwise stick to a story linecome what may. But say you pay attention to data?

Well, let’s start with the peak of the Kimel curve, which (in this version of the model) occurs at a tax rate of 67% and a growth rate of 5.85%. Is that reasonable? After all, a 5.85% increase in real GDP is fast. The last time economic growth was at least 5.85% was in the eighties (it happened twice, when the top rate was at 50%). Before that, you have to go back to the late ‘60s, when growth rates were at 70%. It isn’t unreasonable, then, to suggest that growth rates can be substantially faster than they are now at tax rates somewhere between 50% and 70%. (That isn’t to say there weren’t periods – the mid-to-late 70s, for instance, when tax rates were about 70% and growth was mediocre. But statistics is the art of extracting information from many data points, not one-offs.)

What about low tax rates – the graph actually shows growth as being negative. Well… the lowest tax rates observed since growth data has been available have been 24% and 25% from 1929 to 1932… when growth rates were negative.

What about the here and now? The top marginal tax rate now, and for the foreseeable future will be 35%; the model indicates that on average, at a 35% marginal tax rate, real GDP growth will be a mediocre 1.1% a year. Is that at all reasonable? Well, it turns out so far that we’ve observed a top marginal rate of 35% in the real worlds six times, and the average growth rate of real GDP during those years was about 1.4%. Better than the 1.1% the model would have anticipated, but pretty crummy nonetheless.

So, the model tends to do OK on a ballpark basis, but its far from perfect – as noted earlier, it only explains about 17.6% of the change in the growth rate. But what if we improve the model to account for some factors other than tax rates. Does that change the results? Does it, dare I say it, Fox Newsify them? This post is starting to get very long, so I’m going to stick to improvements that lie easily at hand. Here’s a model that fits the data a bit better:

Figure 3

From this output, we can see that this version of the Kimel curve (I do like the sound of that!!) explains 36% of the variation in growth rate we observe, making it twice as explanatory as the previous one. The optimal top marginal tax rate, according to this version, is about 64%.

As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut. However, keep the tax rates at the new “lower, tax cut level” and if that level is too far from the optimum it will really cost the economy a lot. Consider an analogy – steroids apparently help a lot of athletes perform better in the short run, but the cost in terms of the athlete’s health is tremendous. Finally, this particular version of the model indicates that on average, growth rates have been faster under Democratic administrations than under Republican administrations. (To pre-empt the usual complaint that comes up every time I point that out, insisting that Nixon was just like Clinton in your mind is not the point here. The point is that in every presidential election at least since 1920, the candidate most in favor of lower taxes, less regulation and generally more pro-business and less pro-social policy has been the Republican candidate.)

Anyway, this post is starting to get way too lengthy, so I’ll write more on this topic in the next few posts. For instance, I’d like to focus on the post-WW2 period, and I’m going to see if I can search out some international data as well. But to recap – based on the simple models provided above, it seems that the optimal top marginal tax rate is somewhere around 30 percentage points greater than the current top marginal rate. The recent agreement to keep the top marginal rate where it is will cost us all through slower economic growth.—

As always, if you want my spreadsheet, drop me a line. I’m at my name, with a period between the mike and my last name, all at gmail.com.—

It occurs to me that I should probably explain why I used taxes at time t to explain growth from t to t+1, rather than using taxes at time t+1. (E.g., taxes in 1974 are used to explain growth from 1974 to 1975, and not to explain growth from 1973 to 1974.) Some might argue, after all, that that taxes affect growth that year, and not in the following year. There are several reasons I made the choice I did:

1. When changes to the tax code affecting a given year are made, they are typically made well after the start of the year they affect.

2. Most people don’t settle up on taxes owed in one year until the next year. (Taxes are due in April.)

3. Causation – I wanted to make sure I did not set up a model explaining tax rates using growth rather than the other way around.

4. It works better. For giggles, before I wrote this line, I checked. The fit is actually better, and the significance of the explanatory variables is a bit higher the way I did it.

Comments (184)

Bruce Krasting

December 27, 2010 9:34 am

67% hey? Garbage. Get a new computer, yours is not working.

CoRev

December 27, 2010 10:04 am

Mike, so you are proposing that a total tax rate of ~78-80% is the optimum for growth. Oh, wait. 47% of the tax payers do not pay federal income taxes, so that rate only applies to the upper 53%. Moreover, to believe Mike’s analysis, he asks us to blindly believe that marginal (federal) tax rates drive the economy.

I won’t re-cite the BEA reports i last referenced, but I will relate Mike’s belief to what I study every day, Anthropogenic Global Warming and the CO2 causation. Even though history shows us there have been ups and downs in temps/economies (yes, that’s plural) any correlations between CO2/marginal tax rates to temperatures/economic changes break down as we extend the time frame.

You see, if we are to believe Kimel’s curve as an economic causative/measure, it would have to hold up over time and environments. If we can find that/those correlation(s) then we could explain how and why Kimel’s curve is true and not just coincidental to his pet theory.

Nope! Still totally unconvinced. Even Ms CoRev wonders where such ideas come from. Her response: “Why would anyone work if the Govt is going to give them what is needed?”

Rev–Why wouldn’t you work anyhow? You may like to work–grow your own food that you could sell as well as eat. Or raise chickens for eggs. Or do carpentry…All sorts of stuff you could do at least for barter or sale. Why would you just sit there if you could occupy yourself otherwise?

So, I answer a question with a question. What’s the proof that high/low taxes in this country have any relationship to the economy at all? Very few people at the high end pay a larger percentage of their income to taxes than people in the middle. So, right off the bat, seems to me that higher income people haven’t got a lot to complain about. Taxes aren’t the deal. What people do with money besides spend/invest it in this country is the big deal.They have all they need from rents, they won’t really work will they? Hmmmm? NancyO

George N. Wells, CPIM

December 27, 2010 10:55 am

I’ll propose a reason why high marginal tax rates have cooincided with high growth periods: when there are high margnal rates the best use of surplus cash is to invest in the company itself, research, product and process improvements, et cetera. When marginal rates are low it makes more sense to simply take the money out of the company for use by the management and shreholders (in that order).

What we have seen in the past decades is exactly what I posit: more-and-more cash is going to executive compensation and little to actual corporate development. Outsourcing is the quick-and-dirty method towards assuring that profits remain high so that executive compensation is to be continued.

Where does the excess money go? Speculative investments — anybody interested in some Tulip Bulbs?

Noni Mausa

December 27, 2010 11:11 am

“…Oh, wait. 47% of the tax payers do not pay federal income taxes…”

Sheesh. First, you must consider that people support the economy not only by paying taxes but by being people – working, raising kids, buying stuff. Without human effort, the taxes are meaningless.

Just being alive requires a minimum level of income or other resources, and pushing people below that level via taxation is not only cruel, but contra-indicated if you want a stable, prosperous country. The Line 2 personal federal deduction ranges from $5,700 to $11,400 depending on the sort of household — hardly enough to live on.

A useful overfiew is here. Leonhardt says, in part: “There is no question that the wealthy pay a higher overall tax rate than any other group. … But there is also no question that their tax rates have fallen more than any other group’s over the last three decades. The only reason they are paying more taxes than in the past is that their pretax incomes have risen so rapidly — which hardly seems a great rationale for a further tax cut. “

Noni

Norman

December 27, 2010 11:24 am

I guess I’m being panglossian here, but, what if there were no “Empire” to contend with on the U.S.A. side, the perks & loopholes that business enjoy, especially the what ever 500, no living off the credit card, none of those no bid cost + contracts, prohibiting of both government (comgress, staffers, etc.), Military officers, moving into private industry that supply the Government, strict adherance to laws & the regulation of same, royalties paid for minerals from public ownership, and I’m sure this is only scratching the surface, would that then justify the present tax rate?

As I read the comments here & other sources, when ever anyone speaks of a higher tax rate for what ever reason, the howls of anguish reach highs that excede a “Tenor” in good voice. I also note that these same howls appear to come from the “Boomer” generation. But. are they not the ones who have gotten us in the mess were in today?

tim worstall

December 27, 2010 11:27 am

Two things.

1) There’s an easier way of explaining this Kimmel Curve. The period of high marginal tax rates is essentially 1940 is through to 1980 ish.

That was also a period of high growth, absolutely correct. But there’s a very good argument that that period of high growth came about precisely because, whil;e technology and productivity were roaring along in hte previous 20 years, there wasn’t all that much economic growth about. So, we might ascribe the high growth to the previous high productivity growth without economic growth.

In other words, while your regressions shows a correlation, the causation simply isn’t there.

2) In the economics of taxation it’s always made very clear that long term effects are different from short term. So try lagging your growth by a decade or two against your tax rates, see what happens then.

(Actually, that last is a little unfair, as I know exactly what will happen. The high tax rates of the 50s will explain the low growth rates of the 70s, the lower but still high rates of the 60s the pick up in growth in hte 80s….)

Norman

December 27, 2010 11:31 am

I appoligize for an error, not all “Boomers” are what I consider responsible for the mess were in, as there are plenty of good honest hard working people who really do care, but are usually drowned out by that other majority because they screem louder.

coberly

December 27, 2010 11:34 am

Mike

i came to scoff. And stayed to pray.

I think there is considerable danger that you… or some mythical future congress… would take your results too seriously and we would have some grim mirror image of trickle down, but for now i think it can only be healthy to present evidence that raising taxes is not going to put us back in the stone age. CoRev, of course, will refuse to work, but the rest of us know that even if the government provides everything we need, we will still manage to think of something else we want.

i think George N Wells is agreeing with another Kimel theory. I don’t know about Jed’s correlation, but i suspect detailed analysis will show that he’s not talking about the same thing Kimel is.

Meanwhile top MARGINAL rates probably don’t have to mean the same thing from one time to another. I could have a 90% top marginal rates on incomes over a hundred million, and that would not the same as a 90% top marginal rate on incomes over a hundred thousand.

so let me fall back on the Coberly curve: pay the goddam bills. then pay for what you need or want. pretty much the economy will take care of itself. a tax is about the same a gravity or friction. a cost of doing business, not a reason to down tools and go on strike because it’s “too much” in an economy where most people have more than they know what to do with.

coberly

December 27, 2010 11:36 am

but the social infrastructure that made us rich is crumbling because we are too damn greedy to change the oil.

coberly

December 27, 2010 11:44 am

norman

but in any case if you are going to have an Empire you are going to have to pay for it. and if the tax rates to pay for empire cause slower growth, well, that’s the cost. what we have today is a congress that wants empire, but doesn’t want to pay for it… except by forcing old people to work until they drop.

coberly

December 27, 2010 11:49 am

worstall

can’t you tell when you are trying too hard. there are undoubtedly dangers associated with excessive taxation, but when you have to propose ten year lags you, and CoRev, are simply announcing that you can come up with any rationalization to deny any facts you don’t like.

as long as you can fool yourself and fool the people… who after all like lower taxes too… you will win the political argument. but watch as your own living conditions get worse, and your own “deficit spending” creates a debt you can’t solve.

Pax Romana

December 27, 2010 11:49 am

Dear tax the other people crowd:

Will you donate to a charity that have an operating expense greater than 50 percent? Or simply pay someone over 50 percent salary and less than 50 percent real work?

This game is played by the congress, state, county, municiple level. When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers? Why do you think almost every state is near bankruptcy? Isn’t that majority of taxes should be used to provide services.

This is the same thing from wall street, let’s pay ourself with other peoples money! Let pay AIG, bankrupt with other peoples money and let’s get congress involved, let’s pay with tax payees money.

I think it’s simply wrong and oppressive to ask people whom honestly work, contribute to have the majority of their working life paying government, taxes. Is it fair to ask someone to do it? Is this why we founded America? To pay higher taxes? The baby boomers have used up the savings from the generation that sacrifices themselves, now they want all the bells and whistles and screw their children.

How about just tax at 100 percent? Problem solved?

coberly

December 27, 2010 11:54 am

CoRev

it’s hard to believe 47% of working age people have less money than I have… and I pay Federal Income Taxes. So I think your 47% must include retired people and babes in arms, school children and people sleeping under bridges. Or were you thinking of General Electric?

CoRev

December 27, 2010 12:06 pm

NanO said: “ What’s the proof that high/low taxes in this country have any relationship to the economy at all?” If you remember the BEA references of last week, that is precisely what they said.

Dunno, that may be why I object to Mike’s single variable analysis.

Mike Kimel

December 27, 2010 12:06 pm

m. jed,

I had forgotten about your post. I also don’t have the pop data handy right now. But I think I know how we’re getting different results, and I will be covering what I think causes the difference in our results.

Something that didn’t go into the post because it was getting too long – and which I plan to discuss in coming posts – is that the optimal tax rate with the naive model is a bit lower (I’m getting in the fifties for the naive model – just tax rates and tax rates squared) in the post WW2 era. The fit drops too.

Now, your demographics seem like a good explanation, but they have two problems. I wasn’t thinking demographics this weekend when I checked for structural breaks, and there is one that explains a lot… and which in turn cannot be explained by demographics. (Like I said, this is a topic for a later post.) But I want to focus on something that can be covered intuitively in a short comment: the difference between our respective data sets. The demographic variable might explain away why growth in the 1960s was so fast, if you’re starting with the 1950s. It will not explain why growth was so fast from 1932 to 1940 and it would be one heck of a coincidence that both periods enjoyed that one big demographic bulge.

Anyway, like I said, I will be spending a lot of time on this concept going forward.

Mike Kimel

December 27, 2010 12:06 pm

Bruce,

Sadly, the other computer I pulled up the file in this morning is also damaged the same way.

CoRev

December 27, 2010 12:07 pm

NanO, aren’t you arguing against Mike’s findings?

Mike Kimel

December 27, 2010 12:14 pm

CoRev,

BEA statistics begin in 1929.

In that time, there have been three years in which real growth exceeded 15%. Minimum tax rate for those three years: 81%.

There have been 5 years in which the real growth rate exceeded 10%. Minimum tax rate during those five years: 63%.

There have been 11 years in which the real growth rate exceeded 8%. Minimum tax rate during those 11 years: 63%.

There have been 17 years in which growth rates exceeded 6% a year. Minimum tax rate during those 17 years: 50%.

There have been 36 years in which real growth exceeded 4% a year. Minimum tax rate during those 36 years: 38.5%.

Perhaps you’re starting to spot a pattern here?

Mike Kimel

December 27, 2010 12:15 pm

George Well,

I’ve stated that before, but never as elegantly.

save_the_ rustbelt

December 27, 2010 12:16 pm

Having been a CPA during the high marginal rate era, there is one problem that likely does not work its way into the model.

During the high tax rate era large corporations (ATT, ITT, IBM, GM) dominated the economy and innovations, and entrepreneurs were suppressed.

Why?

Entrepreneurs are always short of cash, and when the business got momentum it ran into the high marginal tax rates. This tended to protect the big corporations from smaller innovative companies.

The law of unintended consequences…………..

CoRev

December 27, 2010 12:24 pm

NanO, I dunno for sure, but think because it predicts so many catastrophic events that we have little to NO HISTORY of ever happening. I have been skeptical of anthro-centric explanations of nature for many decades. For me it rings so untrue and egocentric, when we are little more than a pimple on nature’s back side.

I guess I just don’t believe mankind is unnatural to this planet’s “nature.” Now, when we move to a totally different planet and we are unnatural. Finally, there are so many statistical exagerations being perpetrated in the name of AGW, that it is hard for any but a true believer (religious fervor level here) to actually believe in those exaggerations.

AGW and Mike’s single variable economics are similar in that they are simple solutions for a complex (economics) or chaotic (climate) problem.

You even seem to dispute Mike’s single variable explanation for economic growth, if you believe in AGW, then you are also in belief in a single variable driving an even more complex climate.

Jack

December 27, 2010 12:28 pm

str,That’s a pretty general statement that would be tough to support with any form of objective data. What innovations are you referring to that did not get developed in the past fifty years? Are you suggesting that all the modern communications technology, medical advances, transportation improvements, electronics, etc, etc, have all occured in the past ten years? That seems tough to believe. Progress has been steady, I would guess, inspite of the tax rates. It’s spending and jobs that may change, but not innovation.

Jack

December 27, 2010 12:31 pm

“When is it acceptable when over 50 percent of the tax dollars goes to pay retiring baby boomers?” Pax Romana

Given all the discussion on this site over the past several years that statement stands out as representative of near total ignorance. Pax, give us all a break and do some homework before mouthing off with such bullshit.

Mike Kimel

December 27, 2010 12:32 pm

tim worstall,

Response to 2 first… I’ll have to play with longer lags.

Response to 1. Actually, the periods of high tax rates began in 1932 – tax rates were raised from 25% to 63%. Leaving out WW2, ’32 to ’40 also produced the fastest economic growth for the time period for which we have actual data.

A simpler hypothesis… The fastest economic growth for the time period for which we had data occurred in WW2. That was the period of biggest increase in what one might call government interference in the economy. The second fastest was 1933 – 1940. That would be the the launch of the New Deal, the second biggest period of government interference in the economy. The third fastest was 1964 to 1968; that would be the launch of the Great Society, and by now I suspect you see where I’m going.

coberly

December 27, 2010 12:35 pm

CoRev

i’m with that. if the tax rate has no relationship to the economy, lets raise taxes to pay our bills, and the economy will do just fine, or not, for other reasons.

coberly

December 27, 2010 12:38 pm

co rev

if you believe man is not affecting this planet, you don’t get out enough.

i am not much of a true believer type, except i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers.

coberly

December 27, 2010 12:42 pm

pax

you are living in a fantasy world.

public employees work. ss retirees paid for their benefits.

there are aspects of public spending i don’t like myself. that’s what elections are for. the problem is when the Big LIars have convinced the Big Fools that they can eliminate government entirely… or just the parts they don’t understand… and that all that money will just come home to feather their particular nest.

Arne

December 27, 2010 12:49 pm

Let me propose a new thing for you to look at (since I don’t want to do the work myself

A combination of higher tax rates with higher poverty rates will increase growth. Growth comes when businesses invest, which comes when they perceive a need. If the government gives money to people who will spend it, demand rises and businesses invest.

Over the past 75 years, the number of people in poverty has reduced. The multiplier for additional government spending has decreased. Periods of high growth have been less pronounced.

Businesses are pretty bad at figuring out when to stop increasing investment. The real estate boom ended in a crash. The dot-com boom ended in a crash. But the Baby Boom kept getting extended, so dragging people out of poverty kept working for a long time. There are less people in poverty, less people with high multipliers, so optimal tax levels (with respect to increasing growth) are lower than they were 50 years ago.

jazzbumpa

December 27, 2010 12:50 pm

Thank you.

JaB (a retired boomer)

Sharky with a Barky

December 27, 2010 12:52 pm

“anybody interested in some Tulip Bulbs?”

Quoting a movie, and your expecting to be taken seriously? WOW!

Sharky with a Barky

December 27, 2010 12:56 pm

It’s the unfunded liabilities that are going to kill us….not infrastructure spending for example.

Look at the states seperatley……they are sinking because of pensions.

Sharky with a Barky

December 27, 2010 1:02 pm

If your including the years 1929 thru 1945, there is no way an honest analysis can reach an honest conclusion. Leave those years out! The economy was driven by different variables that today. We are a financial sector based economy right now….we have given away our power….apples and oranges!

m.jed

December 27, 2010 1:07 pm

Don’t have enought time to work on this right now, but I will say in 1931, % of population aged 45-54 was 10.7%. In 1940 it was 11.8%. In 1992 it was 10.7%, in 2000 it was 13.5%. To be fair, in 2008 (the most recent in my file) it was 14.6%.

The other interesting component is the change in “non-working” demographic of under 15 and 65+, which went from 34.5% in the 1931 to 31.8% in 1940; and from 34.6% to 33.8% 1992-2000 and to 32.9% in 2008

Other demographic groups may have greater explanatory power, I chose this one, IIRC, because it’s traditionally the highest earning cohort.

CoRev

December 27, 2010 1:11 pm

Mike your respnse is nonsensical. You just said of the 81 years since 1929, 72 of them had growth and tax rates exceeding 38.5%. But your argument is: “To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent.” So, to interpret the marginal income tax rate should be ~ 58.5 to 71.5%. In the BEA numbers you cite, that occurred in less than 24% of the time. While the good growth, 4% or better, occurred in more than 88% of the time with a 100% correlation that there were marginal income taxes collected.

So, you have taken one piece of data where taxes and economic growth were maximized, and shown a correlation of a totally different theory regarding their optimums. The data clearly show that maximum growth occurs/ed at 81%.

So the pattern I am seeing is one of an economist locked into a simple theory to completely explain a complex system without the barest of understanding of causation.

In the real world you are suggesting the solution to ressions is raising taxes, and to eleiminate recessions raise taxes to astronomically high rates. Isn’t that the real world implementation of your findings?????

Noni Mausa

December 27, 2010 1:15 pm

If @Pax is referring to SocSec. let me remind everyone that the highest SS payment is still at or just below the poverty line. Oh, and when the “hard working taxpayers” morphed into lazy entitled boomers, they had paid into SS for their whole working lives. SS, which they paid for up front, is now all that is keeping many from kicking their jobless kids out of the basement so they can live there themselves.

Oh, and in looking at the comments, one factor seems to have dropped out of the discussion — Mike is discussing the Top Marginal Rate, the rate people pay on all earnings after the first quarter million or so a year. They still have a good chunk of the quarter million to play with.

coberly

December 27, 2010 1:17 pm

m.jed

no doubt, but you are taking some unnecessary restrictions on the data which i suspect completely invalidates any general conclusion.

disclaimer: i know nothing about econmics, and only a little bit about thinking straight. but i like Mike’s conclusions because they at least show why we need to take the conventional wisdom a little less seriously. the conventional wisdom always turns out to be a rationalization for doing what people with money want to do. and that always turns out to be “less than optimal.”

but in fact, worrying about what is optimal is what i am arguing against here. we don’t know what is optimal. never will. but we should be able to tell when what we are doing is hurting real people right now. and i don’t mean by not giving them more money to spend at walmart.

Sharky with a Barky

December 27, 2010 1:17 pm

Sticking with Oil has nothing to do with greed…It’s common sense. Show me what to switch to without destroying the economy, and I’ll bite!

Sharky with a Barky

December 27, 2010 1:19 pm

“i did take high school chemistry seriously enough to remember a few facts routinely wished away by the climate deniers.”

Yeah…Like What?

coberly

December 27, 2010 1:20 pm

sharkey

we are ALWAYS in a different economy. Mike is just looking at some variables to see what explanatory power they may have… if only to dispel the “explantory” power claimed by those who want to reach the opposite conclusion.

for myself, i don’t think that maximizing growth is even sane, let alone the criterion upon which policy should be based.

CoRev

December 27, 2010 1:23 pm

Dale, when hgave I ever said tha man is NOT affecting the planet? What I said above is that man’s effect is natural. Just as natural as a volcano, hurricane, increase/decrease in solar radiation, etc. BTW, which of that list is most influential on climate? Hint: where does that ole heat come from?

coberly

December 27, 2010 1:26 pm

pax

the model you are working with is the model of a dysfunctional family in which if sister sue gets the bigger piece of burfday cake, brother bob has to get the smaller.

actually a country is more like an organism… if your left arm gets more food so does your right arm.the stronger each of us is, the stronger we will all be.

the problem is that there are people smarter than you who go around telling you that the smartest thing for you to do is hulk in your cave and guard your bones from the other cave dwellers. and because those people are so sleek and fat you figure they must know something. then they go back to the valley where they live on milk and honey, and send you messages every year reminding you how important it is to stay in your own cave guarding your own bones and don’t pay any attention to those communists who want you to learn to work together.

tim worstall

December 27, 2010 1:28 pm

“The fastest economic growth for the time period for which we had data occurred in WW2.”

Making things then blowing them up doesn’tr meet my definition of either adding value or of economic growth. Sorry, but I simply don’t trust wartime statistics on growth (any war, any country).

“The second fastest was 1933 – 1940.”

That’s rather my point actually. The immediately preceeeding four years were the largest contraction in a peacetime economy anywhere by anyone. Of Course there was going to be strong economic growth after that. Even dead cats bounce you know.

64-68, sorry, don’t know enough about the US economy to be able to comment.

My argument is encapsulated here:

http://www.marginalrevolution.com/marginalrevolution/2010/12/books-to-crave-a-great-leap-forward-1930s-depression-and-us-economic-growth.html“This thoughtful re-examination of the history of U.S. economic growth is built around a novel claim, that potential output grew dramatically across the Depression years (1929-1941) and that this advance provided the foundation for the economic and military success of the United States during the Second World War as well as for the golden age (1948-1973) that followed. Alexander J. Field takes a fresh look at growth data and concludes that, behind a backdrop of double-digit unemployment, the 1930s actually experienced very high rates of technological and organizational innovation, fueled by the maturing of a privately funded research and development system and the government-funded build-out of the country’s surface road infrastructure. This substantive new volume in the Yale Series in Economic and Financial History invites renewed discussions on productivity growth over the last century and a half and on our current prospects.”

The simplest way of putting this is that the normal technological and productivity trends weer humming alonog from 1929 to 1941. But there was very little overall economic growth. Thus the post war long boom was really being driven by catch up .

coberly

December 27, 2010 1:29 pm

sharkey,

they are sinking because the people who got all the money won’t pay taxes. those damn pensions were earned. that was part of the money they were paid for working… real work that benefitted you… they took that part in deferred compensation because they figured that was safer than taking it up front and playing games on the stock market.

they figured the state would be good for it. little did they realize the state was made up of people who would turn out to be just like stupid and greedy bosses always turn out.

coberly

December 27, 2010 1:32 pm

arne

i tend not to agree. being soft here because i don’t know. but if there is poverty at all, there is room for some kind of growth. we may not need the RATE of growth that we had in the past, but we need better directed growth.

in any case the last “stimulus” was spent on rescuing rich people from their own folly, so it’s hard to claim any reduction in the multiplier.

kharris

December 27, 2010 1:33 pm

“Why would anyone work if the Govt is going to give them what is needed?”

Ms. CoRev has uttered a non-sequitor. This post has to do with the impact of government taxation on growth rates, not on the nature or level of spending funded by those taxes.

Sharky with a Barky

December 27, 2010 1:34 pm

Coberly,

The pensions were typically negotiated by a union, they negiotiated more than what should have been negiotated for. Now the states are going to sink! Doesn’t mean they don’t deserve a pension, but look at California’s situation, most of the pensions state workers and teachers are going to get are clearly undeserved. I happend to believe this was by design…Cloward and Piven Baby!

Nancy Ortiz

December 27, 2010 1:44 pm

No, Rev. I don’t think he is arguing for a causative relationship. People who advocate low tax rates or a flat tax say that their ideas would cause economic growth better than higher taxes. I think that what Mike is saying is that look at these years–no support for the high rate produces low growth theory. NancyO

Pax Romana

December 27, 2010 2:04 pm

Coberly

Noticed that I actually support taxes and government, but what I trying to point out is accountability. Whenever I donate to charity, I always check their expenses and make sure more than half goes towards helping people. I once noticed a very famous national charity have over 70 percent administrative expense… That’s called fraud.

A progressive tax system have to make sure everyone contributes, even for the poor and rich. This is missing in our society. The honest working people is paying for people that can be productive and don’t work, and people in government/wall street that is screwing the tax payers.

I just don’t agree at all with the ultra left idea of screwing the productive rich because they seemed like a easy target. Is it really fair to ask someone to work more than their adult life in taxes? Should rest of us follow this example and bear the same responsibility? Don’t ask someone else to do it unless you are prepared to share the same accountability. This is missing in our current society… The greatest generation all scarified yet the later generation gets progressive less so…

jazzbumpa

December 27, 2010 2:08 pm

Pax -

Coberly is too polite.

Your post is not only mean spirited, it is butt ignorant, bordering on deep stupid.

Like all my boomer brethren, I paid into SS for over 40 years. What I collect now is deferred pay. Same with pensions, which employers owe to their retirees as part of their contractual obligations. It makes no difference if that employer is General Electric, or the great state of New Jersey. This bears repeating, since you think State taxes should pay for services – State pensions are deferred pay for services rendered. The inability to pay comes from an unwillingness to tax.

Your Federal tax dollars don’t pay my SS. They pay for wars. How do you feel about that?

I think it’s simply wrong and oppressive to ask people whom honestly work, contribute to have the majority of their working life paying government, taxes.

Which is exactly why we have progressive taxation, and tax credits for the working poor.

I hope you usually think things through better than this.

BTW, in case you’re interested, In U.S. history there has been one major cause of deficits, and that is spending on the military. Since Reagan, there has been a secondary contributor, and that is not collecting enough taxes.

The Viet Nam war (pre-Reagan, remember) did NOT lead to big deficits, because tax rates back then were high enough to cover the cost.

So, what did W do? Go to war and cut taxes! This is the most grotesque example of fiscal irresponsibility in all of human history.

California’s fiscal woes are the legacy of Prop 13. Texas is just as bad off, but somehow that never gets mentioned.

Now, I must go hug a squid.JzB

Pax Romana

December 27, 2010 2:12 pm

It’s not about pensions and social security per se. But accountilibilty. At all levels we as an society have chosen to be blind to the problem. I.E. Whose going to pay for it!

It is rather naive… Oh! Look at the past, just raise the top marginal tax rate.. Problem solved!

But with the firm guidance of congress, who have exception(s)…. Your not really taxing anyone who games the system.. The unions, wall street, politicians…

Only the honest, “stupid” people pays taxes… Oneday we will run out of those accountable people too…

CoRev

December 27, 2010 2:13 pm

NanO, he defintely is proposing a causative realtionship. Otherwise why do the analysis at all? The only thing I could decipher from Mike’s BEA numbers in his comment is that we are actually a very successful economy.

jazzbumpa

December 27, 2010 2:14 pm

They are sinking because they have been underfunding those pensions for a couple of decades. This is stupid short term thinking that has only reached crisis proprtions becaue of the current downturn.

I agree that there is definitely a lack of accountability in society. Its a real pity that we have a Bill of Rights and no Bill of Responsibilities, and I’m not being facetious. Everyone knows their rights, and nobody feels any responsibility.

jazzbumpa

December 27, 2010 2:31 pm

Anre -

Your broad brush is painting an inaccurate picture.

Poverty wasn’t measured 75 years ago, but from what we do nkow, it’s a safe bet it was higher then. There have been exactly two known periods when the poverty rate has gone down: 1) Kennedy-johnson and the Great Society, and 2) the Clinton adminaistration.

I would happily believe that the marginal tax rate does not drive economic performance. If we accept that view, then we are free to use the marginal tax rate to pursue other goals, such as reducing the deficit and redressing income differentials.

If, on the other hand, we believe that marginal tax rates do play a role in determining outcomes, then we need to understand what that role may be, and that requires looking into the data. What we can’t honestly do is claim that marginal tax rates are important when selling tax cuts, and then claim they aren’t important when data show that tax hikes might produce better results.

I saw that post at MR, and while I haven’t read the book, my first thought was:

a) this guy Field seems to actually have some familiarity with 1930s which is very unusual for an American writing about the 1930sb) he’s missing one key detail about unemployment figures for the 1930s – they seem to all trace back to one clown who created a series long after the fact who decided that it would be clever to classify people employed by the WPA and the CCC and similar agencies as being unemployed. Its one thing to treat WPA workers as not part of the labor force (like folks in the military), but calling a few million people who are getting paid to build roads and the like unemployed is the kind of thing you’re only going to do if you’re trying to bias the numbers. c) that is to say, we overstate how bad the Depression was, post 1933, for folks who were not affected by the Dust Bowl. (For folks affected by the Dust Bowl, no overstating is possible.) Not that times were good, mind you. However, people in my family tend to live forever, and from conversations I’ve had with them, working and lower-middle class families survived, often on a single paycheck, throughout the mid to late 30s. These days such families don’t keep the house.

kharris

December 27, 2010 2:38 pm

CoRev wrote:

“In the real world you are suggesting the solution to ressions is raising taxes, and to eleiminate recessions raise taxes to astronomically high rates. Isn’t that the real world implementation of your findings?????”

However, Mike had already covered CoRev’s question:

“As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will grow more slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut. However, keep the tax rates at the new “lower, tax cut level” and if that level is too far from the optimum it will really cost the economy a lot.”

A policy of cutting taxes during recession – which Obama recommended and Congress did – does provide a short-term lift to growth. Leaving the tax cut in place causes a long-term deterioration in growth. That, in short, is what Mike had already said.

coberly

December 27, 2010 2:48 pm

kharris

excellently said. (btw i am glad to see you support the use of mathematics in addressing some political questions, even it statistics is a bit wobblier than arithmetic.)

coberly

December 27, 2010 2:50 pm

sharky

well the one i remember most fondly is a certain confusion about the significance of a one point change in the pH of the oceans. but i have to say re your comments is i wish people would not bring their children to class.

coberly

December 27, 2010 2:52 pm

well, CoRev

the heat comes from the sun, but it is trapped by the greenhouse gasses, warming the planet more than would be the case without them. man’s “natural” effect on the planet seems to be leading to a point where life as we know it will not be able to survive. doesn’t mean there will be no life. doesn’t even mean that humans won’t survive. does mean many things will change, not for better.

coberly

December 27, 2010 2:54 pm

sharkey

i twisted the metaphor so there is some excuse for you. i was thinking of the people in los angeles who buy ferraris and then don’t change the oil.

coberly

December 27, 2010 2:57 pm

pax

i more or less agree with your ethics, but i think your facts are not quite up to snuff. there aren’t that many people who could would who aren’t. and those who are on the dole aren’t getting all that much. i would prefer to see a system that “made work” if it was real work, for people who can’t find work on their own.

but the problem we are having today is not too many people on welfare… and SS is not welfare… but simply that the people who have money don’t want to pay the taxes needed to pay for what they want from government.

Sharky with a Barky

December 27, 2010 2:59 pm

Coberly,

You can’t continue to push the politics of the AGW debate, unless you put together a strong arguement to defeat the other sides arguement. They aren’t “deniers” because of politics, unlike the otherside, they are “denires” as you put it, because nothing has been proven to them, which diverts the debate to politics instead of science.

Until science can back the claims of AGW believers, it is a political dicussion, and the “Deniers” have every right to question.

coberly

December 27, 2010 2:59 pm

just to be clear

i regularly disagree here with the “soak the rich” crowd. i think the rich need to pay a fair (progressive) tax, but I don’t think the answer to every problem of the poor is to take the rich man’s money and give it to the poor person.

Sharky with a Barky

December 27, 2010 3:01 pm

“owe to their retirees as part of their contractual obligations”Just because it’s a contractual agreement doesn’t mean it is deserved.

coberly

December 27, 2010 3:02 pm

ah yes, the bad old unions made the state an offer it couldn’t refuse.

Sharky with a Barky

December 27, 2010 3:05 pm

Jazz,

The public is not “unwilling” to pay for it, but if the agreement is unreasonable and un-necessary then it is not the public who’s problem it is. It is the problem of the people who are recieving the unreasonale benefit, which will surely be cut short.

When that happends, you can’t blame the public who’s money actually went to attempt to fund the unreasonable benefits.

save_the_ rustbelt

December 27, 2010 3:39 pm

Check where the innovation came from (e.g., Bell Labs, IBM) and the pace of innovation (dial phone several decades, push button phone two decades etc.). Progress has not been steady, it has accelerated significantly.

Tax rates are certainly not the only factor, but the 60s and 70s were dominated by the big old players and entrepreneurship was tougher.

Basic managerial accounting.

coberly

December 27, 2010 3:43 pm

CoRev

it’s hard to decipher anything when you have your mind made up as to what the answer has to be.

even after Nancy explains it to you, you still ask “why do the analysis at all?” Well, to cast doubt on the tax cuts for all reasons, tax cuts for all seasons, conventional wisdom, for one.

coberly

December 27, 2010 3:45 pm

no coRev

your logic amounts to “if my shoe is untied, the answer is to tie it as tightly as i can, choking off circulation to my foot, and making a knot i can’t untie, and tying it to the roof just to make sure.”

coberly

December 27, 2010 3:47 pm

sharky

the science is pretty conclusive. except to people who don’t know a damn thing about science. or much of anything except except to keep repeating “not proved not proved not proved” because they read it somewhere.

coberly

December 27, 2010 3:51 pm

shakey

the reason we have contracts is to limit the endless argy bargy over what is “deserved.”

Noni Mausa

December 27, 2010 3:54 pm

Plus one more element — in the 30s families were larger than today, far more lived in rural areas, and even in cities there was wiggle room for keeping livestock and working very small odd jobs.

These add up to more wiggle room outside of the cash economy. Children of poor parents often had a grandparent’s or uncle’s farm to be lodged at when things fell apart at home, wild game could be shot and firewood gathered or cut, hired men could live in the barn and trade their labour for meals and shelter. Small towns could afford teachers because they, like the hired men, could be paid a pittance and lodged and fed by local families (probably not in the barn, though.) Spilled coal in the summer and spilled ice in the winter were picked up by the kids.

I will agree that America today is far wealthier than before the depression. But where’s the wiggle room? Grandpa’s farm is now a friend’s sofa, and you can’t keep a few hens out back, or gather spilled natural gas down at the railroad tracks. The economy for the average person is much larger (yay for central heating and good plumbing) but also more brittle. And if your chunk of the economy snaps off, chances are fair that your (much smaller) extended family has also reached the end of their glacier and don’t have a spot in the barn for you.

Noni

Jack

December 27, 2010 4:12 pm

“” Whose going to pay for it!(?)”” Pax Funny how so many are concerned with who is going to pay for all this or that, but so few seem to be concerned with who received so much of what was spent. That’s the answer Pax. Those who have benefited the most from the government that they seem to disrespect so much (or is that a rouse?) Whose income is the government so intent on protecting? You can’t determine how much tax, and from whom, is the right amount to collect if you don’t take into account who is receiving the greatest benefit from the system that is costing so much to maintain.

Jack

December 27, 2010 4:16 pm

“Whose going to pay for it!(?)” Pax Funny how so many are concerned with who is going to pay for all this or that, but so few seem to be concerned with who received so much of what was spent. That’s the answer Pax. Those who have benefited the most from the government that they seem to disrespect so much (or is that a ruse?) Whose income is the government so intent on protecting? You can’t determine how much tax, and from whom, is the right amount to collect if you don’t take into account who is receiving the greatest benefit from the system that is costing so much to maintain.

Jack

December 27, 2010 4:30 pm

“These add up to more wiggle room outside of the cash economy.”This statement caused a little bell to ring in my head. There’s plenty of empty space there, as my wife will attest to. The cash economy. Why does no one ever address this issue when the talk is of taxation? In the work I do I see a lot of “small” business people who spend large and earn a pittance. From time to time I have to remind a guy that the bank won’t lend him $80K to buy that cdar if he enters $75K in the income blank on the application. The other side of that coin is the many “small” business people, professionals included, who expense some pretty luxurious transportation through the business. “Our accountant only allows us a lease payment of $1,300 monthly.”

There seems to be an awful lot of income that’s escaping any tax at all. I love the concept of selling a guy an $85,000 Hybrid and the government allows a tax credit of $1,800. There can’t be too high a top marginal rate. No one is going to pay it any way.

Nancy Ortiz

December 27, 2010 4:30 pm

Sharky–That was a gratuitously nasty remark. It won’t do. We have disagreements here but manage to keep on topic. I suggest you do the same. NancyO

CoRev

December 27, 2010 4:37 pm

KH and Mike said: “As to other features of the model – it indicates that the economy will generally grow faster following increases in government spending, and will growmore slowly in the year following a tax increase. Note what this last bit implies – optimal tax rates are probably somewhat north of 60%, but in any given year you can boost them in the short term with a tax cut….”

My first highlight is to make the “Well Duh!” point. Since Govt spending is an important part of the economic calculation any surge in that spending will show an increase over that spending not happening. Oh, and that rate increase should correlate highly with the spending rate increase. Of course we could refine the Duh moment with discusssion of multipliers and differences between the rates of change, but it still remains: Well, Duh!?!!!

The more interesting finding is the second highlight. Taxes up = slower growth! But, Mike still wants us to think that his model supports his theory: “To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent.”

Why is that interesting? Because even Mike and his model believe that you can not get there from here! It will take either one very large tax increase or several/many smaller tax increases. Both slow growth. The several/many option slows growth for an extended period. The one large increase option slows growth deeper (causes a recession?), but may not last as long. Whoopee!

The funny part of this analysis is that Mike proves the value of Reagan/Bush/Obamaonomics. Increase Govt spending without the economic shocks/risks of increasing taxes.

Beautiful.

Joseph Calhoun

December 27, 2010 4:38 pm

I’m new here so if you’ve addressed these items in previous posts I apologize:

1. After WWII the US was basically the last major economy left with undamaged productive capacity. Surely that had a rather large effect on our growth rate quite independent of any of the variables you list, including the top MTR.2. Also after WWII with Bretton Woods, we had fixed exchange rates. How might that have affected growth before and after 1971? So much of what we observe about different growth rates, inequality, etc. can be traced to the 1970s and the most obvious, large change of that time was the end of Bretton Woods.3. If MTRs only explain roughly 1/3 of the variance in growth rates wouldn’t your – and our – time be more profitably spent working on the other 2/3? Or is this just about winning an argument and proving that your political tribe is better than the alternative? If that is the case, tell me now so I won’t waste any more of my time here.4. How do you account for the relatively narrow range for tax revenue as a % of GDP over a wide range of MTRs? You seem to be implying that greater government involvement in the economy produces higher growth rates but if the higher MTRs don’t produce more revenue, can that really be true?

I’m not necessarily opposed to higher MTRs on the upper income levels but I suspect there are other more important factors involved. It seems to me that what we are really talking about here is not just economic growth but the larger debate concerning wealth and income inequality. Or to put it more simply, what we are interested in is a society that is fair to all its members. If that is what this is really all about, I would politely suggest that the whole debate about MTRs is a misdirection by the powers that be. In fact, changes in MTRs are a boon to both politicial parties and the lobbyists who feed them. How much cash has the Republican party raised in the name of fighting higher taxes? How much has the Democratic party raised in the name of raising those same taxes? Maybe the real causes of our problems lie elsewhere.

CoRev

December 27, 2010 4:48 pm

KH said: “I would happily believe that the marginal tax rate does not drive economic performance. If we accept that view, then we are free to use the marginal tax rate to pursue other goals, such as reducing the deficit and redressing income differentials.” Exactly, except we are already doning the redistribution trick. With Dem/Obama suggestions that ~65% marginal tax rate would only apply on those who make >$250K. Then we have AMT2 on top of AMT. What a thought. The unanticipated consequences of class warfare.

KH also said: “What we can’t honestly do is claim that marginal tax rates are important when selling tax cuts, and then claim they aren’t important when data show that tax hikes might produce better results.” I know of no one making the latter claims, but many that make the first claim. Oh, and that includes you and Mike.

kharris

December 27, 2010 4:53 pm

Let’s just put aside the misdirection.

You claimed that Mike was calling for tax hikes to end recession. I pointed out that Mike had already made clear that was not his point. Either you didn’t understand what Mike wrote, didn’t bother to read it, or pretended he had not written it.

I pointed out to you that your sneering nonsense ignored a statement Mike had already made. Your response is just wierd, but let me help you through this.

Sometimes, you can’t have everything. Sometimes, you make short-term sacrifices in service of long term gains. If, as Mike finds, a higher tax rate than we now have is optimal over the long run, then you raise tax rates. A wise policy maker, one who is not just throwing dust in the air to keep people from pursuing optimal policy, minimizes short-term harm while pursuing long term improvement. Like hiking taxes when growth is at trend or better, or hiking taxes on high savers when there is a shortage of demand, but leaving taxes on those with low savings rates alone. Your argument is essentially the standard modern GOP argument – if tax hikes can cause any slowing in growth, ever, then tax hikes must never be done. We raise the Fed funds rate to slow growth. The GOP urges spending cuts, and we know that those slow growth in the short term. We make policy choices pretty often that tend to slow growth. The modern GOP has created the fiction that taxes are magical. Mike has shown that they aren’t. Since taxes aren’t magical, we have reason to find out how they affect the economy, and use that knowledge to our advantage. Why do you want to stand in the way of such knowledge?

PJR

December 27, 2010 4:59 pm

Seems to me that the existance of the Kimel Curve (shape) is the first issue, and then the peak is the second issue, for policymaking. Kimel (and Wells in the comments here) have offered an hypothesis on why the general shape should be expected. It makes sense, but it probably ought to be the subject of research if this hasn’t happened already–e.g., do entities subject to the top rate behave as claimed. If the behavior and curve is real, then the peak should be closely examined. Maybe commenters are right that changes over time have shifted the curve to the left, and Kimel needs to consider more in the theory and model to capture this shift–an important hypotheses to be considered. Regardless, the Kimel Curve potentially offers a simple, policy-relevant model that can replace and improve upon–not merely discredit–the model/myth that lower top tax rates promote economic growth.

CoRev

December 27, 2010 5:01 pm

Than heaven for those GHGs. They, by many estimates, raise the earth’s temperature ~33K (That’s Kelvin.)

Dale said: “man’s “natural” effect on the planet seems to be leading to a point where life as we know it will not be able to survive. doesn’t mean there will be no life. doesn’t even mean that humans won’t survive. does mean many things will change, not for better.”

Dale’s bought into the myth hook line and … while claiming not to be a “tru bliever”. The myth is that warming is better than cooling. You see, climate is the definition of change in long term weather conditions, so stasis is not even studied nor possible. So if you believe Dale and the myth, living in a Hawaiian climate is worse for us than polar climes. I use those examples as they represent the extremes with the warmer climate being the tipping point into (fill in your own catastrophe here.)

kharris

December 27, 2010 5:02 pm

Don’t remenber whose gag it was, but it ran along the lines of:

Cop 1: “He died a natural death.”

Cop 2: “A natural death! He’s got a knife sticking out of him!”

Cop 1: “It’s perfectly natural to die when you have a piece of metal stuck in your heart.”

Sticking knives in people may lead to a “natural death”, but sticking knives in people is discouraged. If the standard is that we do something, and that something leads naturally to a bad consequence, that doesn’t really add up to “So it’s OK to do it.” The terms you’ve set up for “It’s natural, so it’s OK” could justify recreational nuclear war.

kharris

December 27, 2010 5:21 pm

As long as you continue to pretend that Mike’s comments all had to do with the same time frame, you can keep chasing your tail. Be honest. Admit that Mike wrote what he actually wrote. Then we’ll have something to talk about.

While we are on the point of you pretending, I’ll point out another bit of nonsense in your latest response. The fact that there is already progressiveness in income tax rates does not mean we cannot make them more progressive. There is huge additional opportunity for redistribution. We should get busy.

CoRev

December 27, 2010 5:45 pm

KH, putting aside the conservativexs are against science spin with your: “Since taxes aren’t magical, we have reason to find out how they affect the economy, and use that knowledge to our advantage. Why do you want to stand in the way of such knowledge?“

What I did say was: “So the pattern I am seeing is one of an economist locked into a simple theory to completely explain a complex system without the barest of understanding of causation.”

So it is actually you who is providing the misdirection.

jazzbumpa

December 27, 2010 5:47 pm

CoRev -

You said:Mike, so you are proposing that a total tax rate of ~78-80% is the optimum for growth. Oh, wait. 47% of the tax payers do not pay federal income taxes, so that rate only applies to the upper 53%. Moreover, to believe Mike’s analysis, he asks us to blindly believe that marginal (federal) tax rates drive the economy.

Once again, you have demonstrated how your cast-in-concrete mind set contributes to your lack of reading comprehension. Hints – search for the value “17.6%,” for starters; then ponder the meaning of “total tax rate.”

Further, Mike, to my knowledge, has never asked us to blindly believe anything. There is usually a ton of data and statistics, along with a rational and coherent narrative. So that statement is utter nonsense. Disagree if you like, but please say something rational that is either illustrative or helpful. Any destructive moron can stand on the sidelines and throw bricks. (BTW, Note that I have not called you a moron. That was an illustrative elaboration. OTOH, I do think your intent is to be destructive, which is why I have no patience with you.)

The more interesting finding is the second highlight. Taxes up = slower growth! But, Mike still wants us to think that his model supports his theory:

Either you’re cherry-picking or you have no grasp of context (not mutually exclusive propositions by the way.) Or, it might just come back again to lack of reading comprehension.

You desperately need a better method of discourse than simply misrepresenting what someone says, then arguing with the misrepresentation. Either that or use more bold, so we’ll know that you’re shouting. Are you totally oblivious to how badly you are embarrassing yourself, or do you simply not care?

Anyway, hope you and Mrs. Rev had a joyous Christmas, and i wish you a happy and prosperous New Year!

Cheers!JzB

Nancy Ortiz

December 27, 2010 5:47 pm

Sharky. The states’ negotiators agreed to the pension systems’ provisions at the time. There have been many opportunities to renegotiate in the interim. Now all of a sudden it’s some sort of Union and employee scam? Won’t fly, Sharky. Incidentally, “who’s” should be “whose”.

CoRev

December 27, 2010 5:48 pm

Sigh!!! Lord protect us from the high minded liberal redistibutionists, for they know not when we are out of other peoples’ money.

CoRev

December 27, 2010 5:54 pm

KH, your task now is to relate the knife to a proven CAGW claim. Your knife gag could entail “self inflicted.”

Nancy Ortiz

December 27, 2010 5:56 pm

Pax–Think about what you are saying. We all worked for what seems like eons looking back and paid our dues. We repaid our student loans, we paid our state, local and federal taxes and lived by the rules. All of a sudden we’re greedy geezers?

I don’t remember a single day as I was slogging it out in the SSA trenches when anybody cut me any slack for any aspect of my work or conduct. Rather the reverse! When the political appointees my my agency were flying first class, I was trundling around in the cheap seats with all the rest of my civil service peers. If you’re looking for someone to punish, don’t look at the people who paid the taxes that kept the country afloat when others thought they oughta get a pass on that odious duty. We’re not the problem. And as long as we’re around, you can bet we’ll be paying our dues.

Otto Maddox

December 27, 2010 5:57 pm

Garbage. Do a cross-sectional time series analysis across countries and see if you get anything remotely close to 65%

You need to explore omitted variables.

jazzbumpa

December 27, 2010 6:05 pm

Actually, since the contracts were freely entered into, one is tempted to believe that they might actually be deserved. Otherwise, why would the States agree to them? And, as has been demonstrated many times – possibly here, I don’t recall off hand – the typical government employee makes considerably less than her/his counterpart in the corporate part of the economy.

Also, let’s consider who those gov’t employees are. You might think that grouchy person at the Secretary of State’s Office or the slow-moving County Road Crew doesn’t deserve her/his pension, though I’m sure your level of comprehension about their job responsibilities and working conditions approaches absolute zero – but what about policemen, firemen, teachers? To hell with all of them – eh?

That is the sort of attitude that makes us angry liberal angry.

Cheers!JzB just another baby-boomer leach on society

CoRev

December 27, 2010 6:09 pm

Joseph, well said: “If MTRs only explain roughly 1/3 of the variance in growth rates wouldn’t your – and our – time be more profitably spent working on the other 2/3? Or is this just about winning an argument and proving that your political tribe is better than the alternative? If that is the case, tell me now so I won’t waste any more of my time here.”

Noni Mausa

December 27, 2010 6:39 pm

Sharkey … if a business enters into a contract, including a pension arrangement, which they privately believe is too large and therefore never undertake to pay … sounds like long term premeditated fraud to me.

Most people have only one little tumbling brook of time, energy and skill with which to pay their way in life, which they cannot store or save up for later. You seem to be saying that once their stream dries up, it’s just fine for their debtors to tear up contracts and run away laughing.

Sharky with a Barky

December 27, 2010 6:44 pm

Noni,

No…I’m not saying that! No one believes that public sector workers in California, for example, don’t deserve a pension, just saying the pipe dream of the pension that was agreed upon was unreasonble, and now the people who provide the tax money to supply that pension have to go down with them…Nobody won!

Lesson to be learned here for the future!

Noni Mausa

December 27, 2010 6:53 pm

Welcome Joseph, drag up a chair.

IMNSHO, if the Kimel curve is useful to explain 1/3 of effects on growth it’s ahead of the pack compared to many other econ theories, which seem to always start well but then have to be shimmed with the phrase “um, it’s complex”.

Also, this is just one of many of his data sets going back sheesh four or five years showing that one way or another, trickle down is just plain wrong, with effects either neutral or opposite to those claimed.

I think there are two contributing factors that are not that complex at all that explain at least as much as tax rates: volatility of monetary policy and political corruption.

The role of monetary policy in producing inequality is particularly interesting and again I don’t think it is coincidence that inequality started to rise when we came off Bretton Woods and entered a period of more activist monetary policy. Periods of currency volatility produce effects that benefit the wealthy and exacerbate inequality. In the 70s and the ’00s with a falling dollar wealthy individuals protect themselves by owning hard assets while the poor see their basic goods (food and energy primarily) take an ever rising portion of their income. In the early 80s and late 90s with a rising dollar the wealthy owned stocks which responded positively to disinflation. While the poor and middle classes may not have been hurt outright by the disinflation they were hurt relatively as the wealthy owned stocks prior to the disinflation. In other words they benefitted first and most.

As for political corruption, I think there is a good reason that higher MTRs don’t generate more revenue. The wealthy have the means to influence the tax code to their benefit. Raising tax rates merely provides an opportunity for politicians to extract a little more rent. That’s why I think this debate is mostly pointless and designed to distract us from the real problem.

coberly

December 27, 2010 7:57 pm

no, co rev. hawaii has its climate, kansas has its. you can’t grow wheat in hawaii.

Sharky with a Barky

December 27, 2010 8:06 pm

“The fact that there is already progressiveness in income tax rates does not mean we cannot make them more progressive. There is huge additional opportunity for redistribution. We should get busy.”

You’ve made the assumption that by increaseing the progressive on the top end produces the more favorable outcome. Why didn’t make that same assumption by reversing it, and making less progressive on the low end?

It exposes a real bias, and don’t pretend Mr. Kimmel even remotely gets covers that analsis in this post!

coberly

December 27, 2010 8:06 pm

calhoun

yes there are other causes, but we can only talk about one of them at a time. if that is a waste of your time, you won’t be missed.

Sharky with a Barky

December 27, 2010 8:13 pm

Coberly,

When the state legislators and the union have not only the same political agenda, but the same leftist philosophy, there wasn’t even’t the possiblity of much disagreement.

“You can’t always get what you want!”- A Rolling Pebble

California is getting what it asked for….Am I supposed to feel sorry for them?

Pax Romana

December 27, 2010 8:44 pm

Social Security is a supplement to retirees, and medicare is a social security safety net for the elderly. They are meant to be a last line for defense for those that aren’t fortunate in society that have the leisure to “save” “plan” for retirement.

Most government employees in our nation that have worked over 20 years with a pension will have a much better retirement than any middle class person can dream off…

My comments aren’t directed to retirees, my comments are directed to a responsible governance of other people’s money! If we as a nation don’t self police well, in the very near future there will not be a social security and/or medicare as we know it.

None of the good progressive ideals nor the independent self determination worshipped by the right will be any use… If you ever lived in a “second” world country such as Ukraine, Russia etc. You will understand… They have the technological know how, the education, the “free” hospital etc. But it’s just a shell… No real, hard goods(real money) to pay for it!!!!

jazzbumpa

December 27, 2010 8:45 pm

Sharky-

In what way is the CA pension system unreasonable?

Got facts and data?

Cheers!JzB

jazzbumpa

December 27, 2010 8:55 pm

CoRev -

Until somebody does the work, we don’t know if it’s 1/3 the variance, 1/10 or 99/100, do we.

Or is this just about winning an argument and proving that your political tribe is better than the alternative?

You are also totally tone-deaf to irony.

If that is the case, tell me now so I won’t waste any more of my time here.”

If that’s what it takes, consider yourself told.

Happy St John, the Apostle’s Day.JzB

Pax Romana

December 27, 2010 9:00 pm

Nancy:

“If you’re looking for someone to punish, don’t look at the people who paid the taxes that kept the country afloat when others thought they oughta get a pass on that odious duty. We’re not the problem. And as long as we’re around, you can bet we’ll be paying our dues.”

This is actually what I am trying explain about accoutability, just think about when they try to rise taxes on you!!!

I am not talking about people whom acutally pay their taxes, I am talking about people whom skip taxes-your politicians whom takes your money, and the wall street who don’t pay any taxes.

The only people they raise taxes on is the people whom are actually pay… That might be you Nancy!! LOL

As for government pensions- like I said, there needs to be acountability. Too many instances of double dipping, insane pension benifits… That’s why there’s a backlash against it. Do you categorize all people on government pension as “bad” just like the same that we should tax the “Rich” or we should exempt the “poor.”

There needs to be a very sober look at these issues. Honest, frank discussion should be in order, instead of blame game. Especially the right versus left… I think both are correct, but needs to be “fair” “accountable” “sustainable”

Remember the spirit of Teddy Rosevelt when he establish the national park, make sure we have a functional forestry service, bureau of land management so that we have perpetual wealth for future generations of Americans… “Accountability”

Bruce Webb

December 27, 2010 9:21 pm

Krasting has his own data sets. Based on what no one seems to know. But clearly more informed than those of the losers at SSA, CBO, and OMB who prolly should be upgrading from those Tandy 64s, at least to an IBM 1086.

Bruce Webb

December 27, 2010 9:26 pm

CoRev the Economic Right has spent the last thirty years EXPLICITLY arguing that investment by ‘Producers’ is driven or discouraged by small changes in top marginal rates. Your point being?

Bruce Webb

December 27, 2010 9:48 pm

The scam ain’t proven. Except in the minds of people who think random e-mails about establishing the limits of discipline authority, something that has gone on since Galileo was dismissed as a freak are evidence. East Anglia was a conspiracy in much the same mode that LaRouchites insist everything can be explained by a strategic alliance between the Queen of England and the Rothschilds. It is not that Lyndon’s folk have no evidence or lack a reasoned argument, it is just that the preponderance of evidence is against them.

Whether talking climate science or the relative reliability of Iraqi War embeds (who saw and more importantly reported only what Don Señor wanted them to) vis a vis more independent and even MSM media you reflexively came down on the side of the Republican favorable talking points. Almost like you had an apologist agenda. Yeah I know that is crazy given all the counter examples of honest—. Gosh like many here I must of missed those.

I do give you credit for being dogged in the face of abuse, it taking courage to continually going up to the scratch line even when your record as a fighting dog is about 2-25. “it ain’t the dog in the fight, it is the fight in the dog’. Your masters must be so proud, if perhaps mystified that you are still withstanding the abuse. I mean even FA went down to defeat as ultimately did PRS before him (though Roland had a good run) but heck you are still up and fighting.

Props! I think. But it has got to be a hard way to pursue your agenda.

Bruce Webb

December 27, 2010 9:54 pm

Sparky with a snarky, in movie or not ‘Tulip Bulb’ is a reference to fricking economic history. Maybe you think a reference to the South Sea Bubble is just to the lighter sides of the musical turned movie South Pacific.

Maybe you could look up ‘Gin Craze’ and so find out it has nothing to do with Tom Cruise in ‘Cocktail’

Bruce Webb

December 27, 2010 10:06 pm

Norman you are a good man who needs a calendar. Boomers conventionally are those born between 1946 and 1964. Not only wern’t most of us not old enough to serve in Constitutional office in 1980, a significant number of us were not old enough to vote. Don’t try to pin the excesses of Voodoo Economics on us, on a calendar basis Boomers are only beginning to move into the higher corridors of power now. In time to rescue this country from the sad sack, accept authority generation known as the Silent Generation (roughly 1928 to 1946 birthdates (excepting my Mom of course who is not to blame for any of this)).

With a few exceptions the Greatest Generation is leaving the scene. Allowing the Silents to play divide and conquer between Boomers and Gen-X. I cry bullshit.

Bruce Webb

December 27, 2010 10:15 pm

Pax you too could buy a calendar. The oldest Boomers have not even know reached FRA ( full retirement age) 1946 plus 66 equalling 2012. The idea that our current deficits are do to payments to Boomers being to be polite calenderically challenged.

Bruce Webb

December 27, 2010 10:20 pm

Pax all I can say is that you have funny methods of punishing Wall Street.

Bruce Webb

December 27, 2010 10:31 pm

Worstall are you arguing that none of that buying stuff to blow up stuff spending didn’t persist to post-war years? Both the civilian airline industry and the whole computing/electronics advancements have their solid roots in WWII tech developments. Even the Interstate System both here and in it’s progenitors Hitler’s Autobahn had their origins in the need to move the military rapidly. I mean that while Eisenhower made an indelible point highlighting the Military-Industrial Complex when push came to shove Interstates were the result of The National Defense Highway Act (or something similar)

peter john

December 27, 2010 10:35 pm

Why work when wages are so low you can’t afford to fed your family. The argument for cutting the tax rate was to boost the economy. The economy instead of growing fell. The experiment should be now over. Time to put it back were it belongs 90%. 57% might be optimal for economical growth but 90% would be optimal for repressing the growth of the oligarchy.

Bruce Webb

December 27, 2010 10:44 pm

Welcome Joseph! (as usual late to Noni). But IIRC German industrial capacity at the end of WWII was pretty much more than it had been before total mobilization of industrial capacity despite Strategic Bombing. The three western occupiers left that capacity largely in place which is why West Germany became one of the richer economies in Europe in pretty short order while the Soviets just dismantled and exported that capacity in that part of Germany under their control.

In order for your argument to hold you would have to show better relative advances in the U.S. For the middle class compared to Western European democracies after discounting for repayment of war loans. (If you read post war British fiction you wonder why whiskey is so ‘dear’ while Americans were swilling down Scotch like it was Bourbon. The answer is that Scotch Whiskey was one of the few products Britain had for export and they starved the domestic market to maintain foreign exchange.

Bruce Webb

December 27, 2010 10:57 pm

Otto please do and then submit it here.

Mike K though a former owner/manager of this site doesn’t have keys anymore. But for my sins I still have powers to put up any guest post I want. Send it to me..

Steve Roth

December 27, 2010 11:29 pm

Mike, would it be hard to substitue real gdp per capita in your regression? A better measure of prosperity, of course, and an easy way to remove a confuting factor.

Would especially love to see it for GDP/hour worked. (Let me know if you want me to pull the data. I have it handy.) This is usually used just as a measure of labor productivity, but 1. it reflects the value of leisure time in a somewhat back-door way, 2. productivity is the magic bullet, and righties love to say that taxes kill it, and 3. it really represents the fundamental comparative advantage equation by essentially valuing goods in hours worked.

“From this output, we can see that this version of the Kimel curve (I do like the sound of that!!) explains 36% of the variation in growth rate we observe, making it twice as explanatory as the previous one. The optimal top marginal tax rate, according to this version, is about 64%.”

I’m giving Kimel the benefit of the doubt here but I rounded. Sorry I didn’t use the exact figure.I’m just tired of the sniping between Ds and Rs. It’s stupid and accomplishes nothing. I’m interested in real solutions. Raising the top rate to 65% may make you feel all Robin Hood but if it doesn’t actually address the problem we’re trying to solve then it doesn’t mean squat. So my question remains: is this just about the same old political power bs or is this a forum of people really looking to figure this stuff out? If it’s the former I’m not interested and I’ll move on. If it’s the latter I might have something to offer and I’d like to see what you have as well. So which is it?

Joseph Calhoun

December 27, 2010 11:54 pm

You might be right Bruce; I don’t have the data at hand but my impression was that large swaths of Europe were pretty devastated which is why we had the Marshall Plan and all that. As for relative advances of the US middle class versus Western Europe I think that would depend greatly on how you measure such things as quality of life which are pretty subjective things. I do know that the position of the dollar as the reserve currency certainly gave us a major advantage. That’s why d’Estaing called it our “exorbitant privelege”.

Anyway, my only point was that there were some other things at work in that post war period for which we can’t control. Likewise for that period after 1971 when Bretton Woods finally collapsed. The fact is that MTRs have been all over the map for much of this period and while we got different growth rates we didn’t get signficantly different revenue as a % of GDP. That sounds like a disconnect to me that implies other factors at work.